As is the case the poor takes the brunt. From article, it seems like India is still very much and agrarian based economy. Furthermore its productivity from agriculture is poor - 50% of the fields are not irrigated! Wonder why the farmers do not get their politicians to set up the irrigation infrastructure so that their livelihood is improved. Wonder why the gov does not do it since it weighs in so much on the country's GDP.
Its economy is more dependent on the monsoon than what happens in the world economy. Reminds of how during the Asian Economic crisis, the city folks lost money on stocks and property. Meanwhile in a padi field in Kedah, the farmer feels little if no impact. Reason is because he is not engaged in the modern global economy.
India’s Ties to Monsoon Economy Mean Inflation Erodes Incomes
Einhorn and Cherian Thomas
Feb. 5 (Bloomberg) -- Movie night and restaurant meals are out for Vinod Kumar. As prices for sugar, onions, and other staples surge after poor monsoon rains damaged harvests, Kumar has been forced to cut back to keep food on the table for his family of four.
“It’s never been so bad in my working life,” the 35-year- old mechanic says in the Feb. 15 issue of Bloomberg BusinessWeek magazine as he shops at Bangalore’s Johnson Market, a century- old tangle of food stalls.
Inflation in India is at a decade high, with consumer prices rising faster than in any other major economy. Industrial output in January increased the most in 17 months, pushing up prices for raw materials. Cotton has jumped up by 13 percent since October, and the benchmark wholesale price index, up 7.3 percent in December, could hit 10 percent within two months, predicts brokerage CLSA Asia-Pacific Markets.
India’s central bank governor, Duvvuri Subbarao, is trying to cool things down. To lower the amount of capital available for lending, the Reserve Bank of India on Jan. 29 increased the cash reserve ratio for banks -- the minimum they have to keep on hand -- by 0.75 point, to 5.75 percent. Higher interest rates may be next. The bank has moved from “managing the crisis to managing the recovery,” Subbarao told reporters on Jan. 29.
China Comparison
As he tries to tame inflation without snuffing out the economic recovery, Subbarao has a tougher challenge than most of his Asian counterparts. In China, inflation was 1.9 percent in December, and the central bank remains focused on nurturing an economic rebound: People’s Bank of China Deputy Governor Zhu Min said Jan. 30 at the World Economic Forum in Davos, Switzerland, that officials will “continue with current accommodative fiscal and monetary policy.”
Even with India’s thriving technology industry, it remains beholden to the vagaries of the monsoon. Less than half of India’s fields have irrigation, so a drought last summer led to food shortfalls in several states. Underdeveloped railroads and highways make it tougher to transport food, leading to shortages and higher prices in many cities.
“You don’t have enough roads, you don’t have enough railroads, you don’t have enough ports,” says Nikhilesh Bhattacharyya, an economist with Moody’s Economy.com. “That amplifies any price shock.”
Challenge for Singh
Rising prices are a headache for Prime Minister Manmohan Singh. In the past 15 years, Indians have ousted two national governments after inflation eroded spending power. Higher interest rates will make it harder for companies to expand, and a 16-year high budget deficit threatens to limit increases in spending on roads and ports.
Indian companies are expressing concern at higher labor costs.
“The rise in food prices will have a cascading effect,” says M.S. Unnikrishnan, managing director of Thermax, a Pune- based maker of heating and cooling equipment. “We can’t keep paying people the same amount if their cost of living is increasing.”
Even as inflation concern escalates, India’s economic outlook is brightening. The International Monetary Fund last week boosted its 2010 gross domestic product growth projection for India to 7.7 percent from 6.4 percent in October, compared with a 5.6 percent pace for last year. Some investors are counting on that trend to continue.
“In the next decade, India is going to grow a lot more than China,” says Justin Leverenz, who has invested in India $2.5 billion of the $15 billion emerging markets fund he manages at OppenheimerFunds. That’s his largest country allocation.
Investor optimism won’t do much to help Kumar, the mechanic in Bangalore. No matter how hard Subbarao and the Reserve Bank of India try, structural problems almost guarantee that India will suffer more wild swings in food prices in the years ahead. The RBI is on the case now, says Singapore-based economist Rajeev Malik of Macquarie Group Ltd., but it’s still at the mercy of India’s weather, infrastructure, and politicians.
“There’s little,” Malik says, “that the RBI can do to fix that.”
-With assistance from Natalie Obiko Pearson in Mumbai. Editor: Chris Anstey
To contact the reporters on this story: Bruce Einhorn in Hong Kong at [email protected]; Cherian Thomas in Mumbai at [email protected].
Last Updated: February 4, 2010 13:31 EST
Its economy is more dependent on the monsoon than what happens in the world economy. Reminds of how during the Asian Economic crisis, the city folks lost money on stocks and property. Meanwhile in a padi field in Kedah, the farmer feels little if no impact. Reason is because he is not engaged in the modern global economy.
India’s Ties to Monsoon Economy Mean Inflation Erodes Incomes
Einhorn and Cherian Thomas
Feb. 5 (Bloomberg) -- Movie night and restaurant meals are out for Vinod Kumar. As prices for sugar, onions, and other staples surge after poor monsoon rains damaged harvests, Kumar has been forced to cut back to keep food on the table for his family of four.
“It’s never been so bad in my working life,” the 35-year- old mechanic says in the Feb. 15 issue of Bloomberg BusinessWeek magazine as he shops at Bangalore’s Johnson Market, a century- old tangle of food stalls.
Inflation in India is at a decade high, with consumer prices rising faster than in any other major economy. Industrial output in January increased the most in 17 months, pushing up prices for raw materials. Cotton has jumped up by 13 percent since October, and the benchmark wholesale price index, up 7.3 percent in December, could hit 10 percent within two months, predicts brokerage CLSA Asia-Pacific Markets.
India’s central bank governor, Duvvuri Subbarao, is trying to cool things down. To lower the amount of capital available for lending, the Reserve Bank of India on Jan. 29 increased the cash reserve ratio for banks -- the minimum they have to keep on hand -- by 0.75 point, to 5.75 percent. Higher interest rates may be next. The bank has moved from “managing the crisis to managing the recovery,” Subbarao told reporters on Jan. 29.
China Comparison
As he tries to tame inflation without snuffing out the economic recovery, Subbarao has a tougher challenge than most of his Asian counterparts. In China, inflation was 1.9 percent in December, and the central bank remains focused on nurturing an economic rebound: People’s Bank of China Deputy Governor Zhu Min said Jan. 30 at the World Economic Forum in Davos, Switzerland, that officials will “continue with current accommodative fiscal and monetary policy.”
Even with India’s thriving technology industry, it remains beholden to the vagaries of the monsoon. Less than half of India’s fields have irrigation, so a drought last summer led to food shortfalls in several states. Underdeveloped railroads and highways make it tougher to transport food, leading to shortages and higher prices in many cities.
“You don’t have enough roads, you don’t have enough railroads, you don’t have enough ports,” says Nikhilesh Bhattacharyya, an economist with Moody’s Economy.com. “That amplifies any price shock.”
Challenge for Singh
Rising prices are a headache for Prime Minister Manmohan Singh. In the past 15 years, Indians have ousted two national governments after inflation eroded spending power. Higher interest rates will make it harder for companies to expand, and a 16-year high budget deficit threatens to limit increases in spending on roads and ports.
Indian companies are expressing concern at higher labor costs.
“The rise in food prices will have a cascading effect,” says M.S. Unnikrishnan, managing director of Thermax, a Pune- based maker of heating and cooling equipment. “We can’t keep paying people the same amount if their cost of living is increasing.”
Even as inflation concern escalates, India’s economic outlook is brightening. The International Monetary Fund last week boosted its 2010 gross domestic product growth projection for India to 7.7 percent from 6.4 percent in October, compared with a 5.6 percent pace for last year. Some investors are counting on that trend to continue.
“In the next decade, India is going to grow a lot more than China,” says Justin Leverenz, who has invested in India $2.5 billion of the $15 billion emerging markets fund he manages at OppenheimerFunds. That’s his largest country allocation.
Investor optimism won’t do much to help Kumar, the mechanic in Bangalore. No matter how hard Subbarao and the Reserve Bank of India try, structural problems almost guarantee that India will suffer more wild swings in food prices in the years ahead. The RBI is on the case now, says Singapore-based economist Rajeev Malik of Macquarie Group Ltd., but it’s still at the mercy of India’s weather, infrastructure, and politicians.
“There’s little,” Malik says, “that the RBI can do to fix that.”
-With assistance from Natalie Obiko Pearson in Mumbai. Editor: Chris Anstey
To contact the reporters on this story: Bruce Einhorn in Hong Kong at [email protected]; Cherian Thomas in Mumbai at [email protected].
Last Updated: February 4, 2010 13:31 EST
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